Katinka Holtsmark, University of Oslo

"Greening Oil: Optimal Extraction During the Transition from Coal to Renewables"

Abstract

What is the optimal and climate-friendly usage of oil during the green transition? In the short term, more oil can replace coal. For the longer term, however, oil extraction should be reduced to motivate investments in renewables. The difference leads to a time inconsistency problem: If a climate-friendly coalition of oil producers cannot commit to the long-term decline, the attempt to replace coal will be anticipated and investments in renewables will be reduced. In this case, the coalition can do more harm than good. To mitigate this problem, the oil producers must tax or reduce investments in the capacity to extract oil even more than they would have done under commitment.

Contact persons: Peter Kjær Kruse-Andersen and Frikk Nesje.